Kieran's Column: Championship is by far the most exciting league in Europe. But also the most bizarre
13 March 2019
We are proud to present Football Finance expert Kieran Maguire as a columnist.
At a time when Financial Fair Play is overshadowing most of the talks about the Championship, Kieran Maguire takes a look at the finances in the clubs.
“Most ridiculous finances of any division," he calls it.
At the start of 2018/19 most fans would have expected that the clubs competing at the top of the Premier League would be Manchester United and City, Liverpool, Arsenal, Spurs and Chelsea, as these are the ‘Big Six’, and eight months later they are competing for the title.
In Scotland it would have been Celtic and perhaps a bit of competition from Rangers, but in the Championship? No one would have predicted a top three of Norwich (who in 2017/18 finished 14th) Leeds (13th) and Sheffield United (10th).
The unpredictability of the Championship is what makes it the most unpredictable and, in many ways, most exciting league in Europe. The Championship also has the most ridiculous finances of any division, in that every single club who has published their accounts to date is making losses.
The Championship presently has clubs who may be subject to points deductions following potential breaches (Birmingham City are due for a tribunal shortly) or ‘soft’ transfer embargoes where players cannot be recruited for a fee and where the annual wage is restricted to £600,000.
The reason why clubs are making losses in the Championship is mainly due to a lack of control over player costs. These are shown in the form of either the wage bill or transfer amortisation (which is the transfer fee spread over the life of the contract signed, so when Britt Assombalonga signed for Middlesbrough for £15million on a four-year contract, this gives a £3.75 million a year amortisation cost in the income statement).
Taking just these two costs into consideration gives a total expense of £674 million compared to income of just £514 million, so clubs are losing money on players before they pay to cut the grass on the pitch, turn on the floodlights or buy equipment for the training ground.
These rules were abandoned, however, when the Premier League announced its new broadcast deal for 2014-17
So, what about Financial Fair Play rules, or as they are now called, ‘Profitability and Sustainability', supposedly introduced to ensure monetary restraint and to ensure that clubs don’t go into administration or other corporate bankruptcy arrangements?
FFP commenced in the Championship in 2011/12 with the aim of gradually reducing allowable losses until they were supposed to be capped at £3 million for 2013/14 and thereafter, although owners were also allowed to contribute an equal sum in the form of shares.
These rules were abandoned, however, when the Premier League announced its new broadcast deal for 2014-17, which increased not only the sums due to individual clubs to an average of £120 million, but also increased parachute payments to an initial £26 million (and then to £41 million for 2017-20 following another successful negotiation of broadcast rights).
Financial advantage to relegated teams
Clubs in the EFL, who averaged income of £16 million excluding parachutes, decided to relax the limits and instead allow clubs to have a maximum allowable loss of £39 million over three years (clubs relegated from the Premier League are allowed an extra £22 million per season of losses for each season in this division for the assessed period).
The increase in the allowed loss was because the parachute payments available to relegated gave them such a financial advantage that other Championship clubs feared they would be unable to compete in the player recruitment market and that the promotion and relegation positions between the Premier League and the Championship would become a Yo-Yo scenario.
Clubs are also allowed to incur certain ‘good’ costs without these contributing towards the FFP limit. These costs include youth development (a Category 1 academy is estimated to cost at least £5 million per year), women’s football, community schemes and infrastructure costs, as the authorities wanted to expand inclusion and the quality of the stadia where fans watched matches.
The reaction to the introduction has varied. The majority of clubs have sought to abide by the rules. Some clubs have ignored them and accepted the penalties, taking the view that the riches of the Premier League are so lucrative that it is a price worth paying. Others have sought to either discredit the rules by claiming that they are anti-competitive and illegal.
Paid out £195 in wages for every £100 of income
The most extreme example of this was in the case of Queens Park Rangers, who were promoted in 2013/14 and in doing so paid out £195 in wages for every £100 of income, with a wage bill that was three and a half times the size of the average club in the Championship that season. QPR initially tried to treat directors’ loans written off as a form of income and then claimed that the FFP rules were anti-competitive and illegal.
QPR’s legal team used delaying tactics, which meant that it took four years to resolve the case, and by then, the club had spent a year in the Premier League, who were immediately relegated and then returned to the Championship, earning £180 million in broadcast revenues and parachute payments during this timeframe. The settlement was quoted in the media as costing QPR £42 million, but when examining the small print had an effective cost of about £11 million and paying the EFL’s estimated £3m legal costs, which is hardly a deterrent to other clubs to circumvent the rules given the rewards on offer.
Because the FFP assessment period is three years, some clubs appear to have taken an approach of gambling by overspending in the first two years with the hope that this will lead to promotion, and if unsuccessful, then rapidly cut spending in the third year to ensure FFP compliance.
Given all of the above, is FFP actually working? Its supporters will claim that no club has gone into administration since the rules were introduced and that it acts as a disincentive to clubs who are trying to ‘buy’ their way into the Premier League.
A look at the last four seasons of clubs promoted (Fulham are yet to publish their results) however reveals that the cost of promotion averaged £29 million, which is hardly an illustration of model business practice, and this includes some clubs who were already in receipt of parachute payments when they earned their golden ticket to the ‘promised land’ of the Premier League.
FFP has become just another topic that is the subject of name calling, one-upmanship whataboutery and ignorance amongst football fans (and sometimes pundits too). The rules are often criticised by managers, media commentators and supporters, but these rules were created by club owners when they have their meetings with the EFL, so if they think the rules are too harsh, they can easily change them, and if they do so, it won’t be the first time this has happened.
Kieran Maguire is a lecturer in football finance at the University of Liverpool. He is widely used in several media as an expert in sport finance, sports broadcasting rights and the budget. Find him at Twitter: PriceOfFootball or @KieranMaguire